By Kayode Tokede
A total of N211.9billion impairment charges by six banks operating in the country weaken profit before tax in 2020, investigation by Nigerian NewsDirect has revealed.
These six banks’ impairment charges in 2019 was N116.56billion.
Analysts had expressed that Banks operating in the country significantly increased impairment charges on loans amid the Central Bank of Nigeria (CBN) directive to meet the 65 per cent Loan-to-Deposit ratio (LDR).
Nigeria NewsDirect can report that Tier-1 banks operating in the country aggressively grew their impairment charges in the year under review.
Specifically, Access Bank in 2020 grew its impairment charge to N62.89billion, 211.5 per cent increase from N20.2billion reported in 2019.
United Bank for Africa (UBA) also reported 37.4per cent increase in impairment charge to N22.44billion from N16.34billion in 2019 while Guaranty Trust Bank Plc (GTBank) reported N19.57billion impairment charge in 2020, 298.5per cent increase over N4.9billion reported in 2019.
The Group Chief Financial Official, UBA, Mr. Ugo Nwaghodoh had said, “We have prudently stepped-up our reserves for loan impairments, hence the 37.4 per cent YoY growth to N22.4billion, implying a 0.9per cent cost of risk.
“These reserves provide adequate cover for impairments and should help minimise the need for further reserves in the current year, in view of the improving global operating environment.”
As FBN Holdings impairment charge dropped by 0.97 per cent to N50.6billion in 2020 from N51.09billion in 2019, Zenith Bank Plc reported N39.53billion impairment charges in 2020 from N24.03billion reported in 2019.
According to FBN Holdings, “On the Asset Quality and Risk Management front, we have continued to enjoy the benefits of our retooled and strengthened risk management architecture.
“This is evidenced by a 0.97 per cent y-o-y decline in impairment charge to N50.6billion (Dec 2019: N51.1billion), declining NPL ratio to 7.7per cent (Dec 2019: 9.9 per cent) with vintage NPL sustained at less than one per cent and improving Cost of risk of 2.4per cent (Dec 2019: 2.6 per cent).
“The impact of the COVID-19 pandemic was muted because of a well-diversified loan book and minimal exposure to sectors most affected by the pandemic.”
Our correspondent gathered that banks were lending to real sector after the federal government ease COVID-19 lockdown and at the same time aggressively going after obligor to recover loans.
With the CBN’s LDR policy, it was gathered that banks were making huge provisions in case these loans go bad.
An economist and President, Association of Capital Markets Academics of Nigeria (ACMAN), Prof. Uche Uwaleke, stated that aggressive lending by banks forced hike in impairment charges.
“Banks are expected to provide for 50 per cent if the interest payment is not coming within 180days. If it is for 90 days, 10 per cent and 360 days, 100 per cent.
“We can’t be talking about 360 because it is not up to one year. COVID-19 lockdown too will also contribute to loan impairment.
“The 65 per cent LDR of CBN means loans to customer went out heavily in nine months and banks are expected to make provision.
“The CBN confirmed it that loans to private sector increased. The LDR is working in two ways. One, it has increased credit to the private sector and it has contributed loan provisions banks are making.
“If we have hike in Non-Performing Loans, it may also be responsible for that.”
Fitch ratings had said Nigerian Bank debt relief measures have prevented a material rise in impaired loans in 2020, but Fitch forecasts the average impaired loan ratio to range between 10per cent-12per cent by 2021 as these measures end.
The head, Investment research & business Development, Pac holdings, Moses Ojo attributed hike in banks impairment charge to CBN 65 per cent LDR policy that mandate lending to real sector.
According to him, “The situation revealed that banks were following the 65 per cent LDR policy of the CBN.
“The LDR policy has made banks increase lending and at the same time making provision for bad loans. Banks are under the obligation of meeting the 65 per cent LDR or face sanction. Some banks are granting loans to people who are not qualified for it and they know they might likely default.”
The report by Fitch ratings had stated that earnings of these banks are expected to recover gradually with the economy but remain exposed to further economic shocks from oil price volatility.
The report stated that, “Bank asset quality has historically fallen with oil prices; the oil sector represented 28per cent of loans at end-1H20.
“Upstream and midstream segments (nearly seven per cent of gross loans) have been particularly affected by low oil prices and production cuts.”
According to the report, the oil & gas sector has performed better than expected since the start of the crisis, limiting the rise in credit losses this year due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis.
“In addition to solid revaluation gains and trading gains, the containment of credit losses will support profitability. With the expiry of relief measures and persistently weak oil prices, we believe the average credit loss ratio to lean somewhat toward the levels seen in 2016.”